Google Has Little to Lose by Taking on China

The best part of the Google news that it's taking on the Chinese government is just that. Google is in a great position of taking the moral and political high ground without risking too much on the economic front, and sticking it to the Chinese.

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A sign is displayed outside of the Google headquarters in Mountain View, California.

By now you know the details: Google disclosed that there have been coordinated digital attacks against companies and individuals with known positions in criticizing or supporting criticisms of the Chinese government. The attacks were so sophisticated that Google surmises they probably emanated from factions within the Chinese government.

So Google, in a blog post today, is now threatening to abandon the Chinese market altogether.

That sounds dramatic, to be sure, but consider this: While China is an important market for many key sectors of technology like chips, smart phones, PCs and software, it's a different ball game for internet companies. Quite frankly, Google has been unable to mount any real effective competitive challenge in China, not because of security concerns, but more likely due to linguistic nuances that have made competitor Baidu a far better search option for Chinese web users.

As a a side note, Baidu is THE stock play as this controversy gains momentum.

Late last year, Stephanie Mehta at Brainstorm Tech/Fortune put together a great post about Google versus Baidu in China. She said, citing Baidu executives, that Baidu's search market share in China was about 77 percent as of the third quarter, up from 75.6 percent in the second quarter.

Google, on the other hand, went from 19 percent to 17 percent during the same period.

Google's search partnership with China Mobile has certainly helped its penetration on smart phones, a fast-growing sector to be sure; but Baidu used the same tack late last year, signing a deal with China Unicom.

Part of Google's problem, according to an analyst I spoke to, is that Baidu has a huge head start in the market, entering the business in 2000. Google didn't get into China until six years later, an eternity in this business. (Think about how hard it's been for Bing to steal market share from Google because it was so late to the market.)

Google might be posturing here, but make no mistake: it is still interested in the Chinese market and may make inroads there when China Unicom and China Mobile begin offering mobile devices running on Google's Android mobile operating system.

Gene Munster at Piper Jaffray told me that the Chinese market represents only about 2 or 3 percent of Google's overall revenue in 2010. Calling it great theater, he says Google's run-in with China might be a terrific political thriller, but economically, it's a snoozer, at least for the foreseeable future. Even as both sides continue to clash, Munster says there's only a 35 percent chance that Google leaves the Chinese market.

A more likely scenario, I suspect, is that Google will announce it is suspending operations in China until it can reach some kind of compromise with governmental officials (good luck).

Bottom line: Google is doing precisely what rival Yahoo didn't do. Co-founder Jerry Yang tried to negotiate and compromise to stay in China. Ultimately, that led to the embarrassing outcome of Yahoo handing over search data of a Chinese dissident that landed that user in jail, serving a 10-year sentence. Yang tried to defend the incident as "business," and some of his arguments - that change has to "come from within" and that Yahoo has a better chance of influencing Chinese policy by staying in the market - even made some sense. Yet, his successor Carol Bartz apologizes for that awful lapse every chance she gets.

And then there's Google - a company rife with PR mis-steps, heavy-handed tactics and a swagger in the market place that makes it an easy target. But in this case, the company is striking exactly the proper tone.

With so little to lose and so much to gain, Google certainly got this one right.